Are Prepaid 529 Plans in Trouble?

Thanks to the stock market implosion, it’s a question families are naturally asking.

This particular breed of 529 plan — the most conservative of the bunch — typically allows parents to buy all or a part of a college degree at today’s costs. If you bought a year’s worth of tuition, for instance, it would still be worth that much years later regardless of inflation or stock market antics.

Each state that offers a prepaid 529 plan assumes the risk that its investment returns will be able to cover the cost of tuition at its own state universities for its investors. Families like the prospect of the state — not the parents — assuming this huge risk.

You won’t find this prepaid guarantee, however, when you invest in the most popular 529 savings plans, where parents select from a menu of underlying stock and bond mutual funds and returns are anybody’s guess.

One prepaid plan — Alabama — is currently experiencing financial trouble, while several states in recent years have closed enrollment in their 529 prepaid programs. Joseph Hurley, CPA, who runs SavingForCollege.com suggests that some states may ultimately have to bail out their programs with taxpayer money.

Is there a better model? I think there is…It involves shifting the actuarial risk from the plan itself to the schools that receive the tuition. The Massachusetts U. Plan has operated in this way since 1995, with over 80 institutions in the Bay State–both public and private–agreeing to accept prepaid dollars in place of full tuition. The Independent 529 Planfollows the same approach as the U.Plan, except its participants include over 280 private colleges across the country.

More recently, the state of Texas, having shelved its original prepaid tuition plan, launched a new prepaid plan that shifts the risk to the state schools in Texas. If plan investments don’t keep up with tuition increases, the school takes the haircut.